RE Finance Ch. 3 The Primary and Secondary Markets

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The industry is divided into two markets that supply the funds for mortgages, what are they?

-primary; where lenders make loans to home buyers

-secondary; where lenders sell loans to investors

In the primary mortgage market, home buyers apply for mortgage loans and residential mortgage lenders originate them. What does originate mean?

-process application

-approve decision

-funding the loan

Primary market was originally a _______ market, made up of local lending institutions.

-local; now it is more spread out due to the internet, interstate banking and other developments

A bank's main source of income is what?

interest on loans

How are local mortgage financing systems affected by real estate cycles?

-local real estate markets can be affected by economic, political, or social factors, such as employment factors, development, tax policy, etc. These local factors can cause people to spend more and banks run out of money to lend, or people save, not making loans. Affects interest rate on mortgage loans.

National forces can affect local cycles, such as economic, political, and social tends. Disintermediation can reduce the supply of funds that local financial institutions have available for mortgage lending. What is disintermediation?

-they created the secondary mortgage market to help source additional funds when demand exceeded supply, and a place to invest their surplus funds when supply exceed demand.

How are loans valued?

by current market interest value

Who buys loans?

-banks

-the Federal National Mortgage Association (FNMA or Fannie Mae)

-the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Nac)

-the Government National Mortgage Association (GNMA or Ginnie Mae)

-other investors

How are loans sold to secondary market entities?

-a lender can "package" a group of similar loans together fro sale to one of the secondary market entities. To be accepted the loans must meet the standards of the entity that is going to buy them.

-after loans are sold, the lender who originated them or another person, does loan servicing to them; includes tasks such as processing borrowers' payments, dealing with collections, and preventing borrower default.

What is Mortgage-backed security (MBS)? How is it created?

-an investment instrument that has mortgages as collateral; it's a type of bond

-is created by securitizing loans; pooling a large number of mortgage loans together.

How do MBS investors get a return?

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How do banks make funds it needs by selling loans to the secondary market?

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Availability of funds in primary market depends on secondary market.

true

Fannie Mae

-The Federal National Mortgage Association (FNMA)

-created to fix unpercedented credit problems during the Great Depression.

-Original purpose was to provide a secondary market for FHA-insured loans; loans the helped make home financing affordable again.